Futures contract
Family I · Instruments
Not to be confused with forward contract, stock index futures, contract size.
Futures contract is a legally binding agreement traded on a regulated exchange, obligating the buyer to purchase and the seller to deliver a specific asset at a predetermined price on a set future date. Unlike private agreements, futures are standardised in quantity, quality, and delivery terms, and are marked to market daily through a clearing house. The contract itself is a financial instrument whose value derives from the underlying asset, which may be a commodity, currency, interest rate, or index.
Key features
Futures contracts are distinguished by standardisation and exchange trading. The exchange specifies the contract size, deliverable grades, delivery months, and minimum price fluctuation (tick). Both parties post margin, which is adjusted daily via mark-to-market to reflect gains and losses. Most futures positions are closed out before delivery rather than settled physically. The clearing house interposes itself between buyer and seller, eliminating counterparty risk.
Worked example: profit and loss on a futures trade
A trader buys one crude oil futures contract at $75.00 per barrel. The contract size is 1,000 barrels. The price rises to $78.50, and the trader sells to close.
Commission and exchange fees are not included. A price fall would produce a loss of the same magnitude per barrel.
Contrast with forwards and index futures
A forward contract is a private, customised agreement traded over the counter, carrying counterparty risk and typically no daily settlement. Stock index futures are a subtype of futures where the underlying is an equity index and settlement is in cash rather than physical delivery. Contract size is a specification of a futures contract, not a separate instrument; it determines the monetary value of a one-point price move.
Often confused with
- forward contract
- A forward contract is a private, non-standardised agreement traded over the counter with counterparty risk, whereas a futures contract is exchange-traded and cleared; the visible sign is that forwards are not marked to market daily.
- stock index futures
- Stock index futures are a specific type of futures contract whose underlying is an equity index and which settle in cash, while a futures contract can reference any underlying asset and may involve physical delivery; the visible sign is the underlying asset.
- contract size
- Contract size is a specification within a futures contract that defines the quantity of the underlying per contract, not a tradable instrument itself; the visible sign is that contract size appears as a number in the contract specifications.